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Until recently, the deepening of financial markets in developing countries has been widely seen as growth-enhancing. A well-developed capital market – so the argument goes – provides a source of finance for productive investment, thus fostering growth. South Africa possesses one of the oldest stock exchanges among emerging economies, making the country a good case study to scrutinise such growth-enhancing effects. Employing a detailed – and original – analysis of company annual reports and financial statements, this article questions the validity of the growth-enhancing claims made for financial deepening. Although the South African equity market is a source of substantial funds for mining companies, the consequences of their activity do not appear to enhance growth but rather to induce financial fragility. New evidence will show that listed mining companies use financial markets to support their speculation in mining assets. As a consequence, financial funds are channelled into few productive activities with limited impact on job creation. Crucially, detrimental effects on monetary policy and domestic credit growth can be expected, since external finance is not flowing towards productive investment but ends up as cash holdings on corporate balance sheets. This trend in turn encourages rapid credit expansion, which recently favoured unsustainable consumption-driven growth in South Africa,1 1 Department of Trade and Industry (South Africa) (hereafter DTI), Medium-Term Strategic Plan, 2011–2014 (Pretoria, DTI, 2011). leaving the country with heavy job losses and high household debt in the aftermath of the global financial crisis.
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